Rabobank today served up Australian wine as an object lesson for the Scotch whisky industry’s need to innovate in areas such as flavour rather than discount, to guard its prestige in times of oversupply.

With Scotch whisky sales booming due to growing demand in the US and emerging markets, the industry in Scotland is increasing production to replenish declining stocks of longer aged whiskies.

To help industry jump off what they nickname the ‘Scotch rollercoaster’, the analysts suggest that the industry (1) continue to grow production but smooth out supply swings (2) resist the temptation to increase production too quickly (3) prepare for innovation rather than discounting.

Australian wine: Industry darling to lame duck

Taking No.2, Rabobank’s analyst recall that Australian wine took the global market by storm in the late 1990s and early 2000s – led by innovation, strong marketing and high quality.

Fast forward to 2014 and they note that a 75% increase in Australian production from 2000-04 and more muted demand has meant “chronic oversupply for the better part of the last decade”.

“Due to this excess supply, the industry has gone through a period of pervasive discounting, which undermined the image of what was becoming an increasingly prestigious wine region,” the analysts write.

The average price of US imports for Australian bottled wine has fallen nearly 30% since 2000 – from circa. US $5.50/liter to below $3, according to the Australian Bureau of Statistics.

‘An appearance of scarcity is critical for prestige’

To set Australia’s wine woes into context, the average price of US bottled wine imports across the board rose by nearly 30% over the same period.

Urging producers to innovate rather than discount – which is part of their linked argument – Rannekleiv et al. urge Scotch players to “maintain an image of prestige in consumers’ minds, creating an appearance of scarcity is critical”.

“The ongoing increase in production, particularly from emerging markets, requires an increase in production, but the industry must exercise constraint in its efforts to grow, or risk deteriorating its image over the long term,” they write.

What might innovation involve? That’s the problem. American and Canadian whiskies, for instance, are generating strong growth through flavour innovations, while Scotch is a bit staid by comparison.

Where’s the Tennessee Honey of the Scotch whisky world?

So where is the Jack Daniel’s Tennessee Honey or Jim Beam Red Stag of the Scotch whisky world?

“Scotch executives…fear flavor variations would undermine the long-term prestige of their brands,” the analysts write.

“For the moment, we believe the companies are probably right to resist aggressive expansion into flavors. In the context of tight inventories, aggressive expansion into flavors would drive volume increases that would potentially cannibalize future sales of more premium products,” they add.

But if oversupply should return in future, the Rabobank team believes that flavour extensions would make better sense than the discounting of brands seen, for instance, in the early 2000s.

“We are not recommending black cherry flavored 18-year old single malts – but flavour extensions and other NPD could play an important role in some cases,” Rannekleiv et al. write.

Such innovations could protect Scotch from losing future consumers to more innovative segments such as bourbon, they add, noting that Scotch consumption fell 5% in the UK from 2011-13, while US whiskey imports grew 35%.